Month: August 2011

Following its January 2010, Regulatory Notice 10-06, providing guidance on communications with the public through social media sites, FINRA has issued Regulatory Notice 11-39 providing further clarification about application of FINRA rules to new technologies. The notice addressed a number of topics, including recordkeeping, supervision, third-party posts, third-party links and websites, and associated persons accessing social media sites from personal devices.

Recordkeeping

FINRA reminds members that their obligations to keep records of communications made through social media depend on whether the content of the communication constitutes a business communication. The SEC has stated that the content of an electronic communication determines whether it must be preserved.

Supervision

As part of its responsibility under NASD Rule 3010, a firm’s registered principal must, prior to use, review any social media site that an associated person intends to use for a business purpose. FINRA has noted that a registered principal must review an associated person’s proposed social media site in the form in which it will be “launched.” Under NASD Rule 2210, unscripted participation in an interactive electronic forum comes within the definition of “public appearance.”

To monitor these fora, FINRA recommends that firms adopt risk-based supervisory procedures utilizing post-use review, including sampling and lexicon-based search methodologies, of unscripted participation in an interactive electronic forum. FINRA requires that any procedure that a firm adopts be reasonably designed to ensure that interactive electronic communications do not violate FINRA or SEC rules. Static posting is deemed an “advertisement” under NASD Rule 2210 and therefore requires a registered principal to approve the posting prior to use.

Links to Third-Party Sites

FINRA warns members that a firm may not establish a link to any third-party site that it knows or has reason to know contains false or misleading content. FINRA concludes that a firm could be deemed to have become “entangled” with a third-party site if, for example, it participates in development of the content on the third-party site.

Data Feeds

The notice also addresses FINRA’s requirement that firms adopt procedures to manage data feeds into their own websites. FINRA is requiring that firms regularly review data feeds for red flags that indicate that the data may not be accurate, and take immediate steps to correct any inaccurate data.

As we mentioned in our July 25, 2011 post, prior to delving into the actual work, skills and knowledge required of a Chief Compliance Officers to an investment adviser, the very first step a CCO should take is to make sure she understands the framework and principles that guide the work they do. Not surprisingly, given the demands of their position, even experienced CCOs ignore or forget some of these clearly written admonitions about the CCO function that routinely appear in canned written compliance policies and procedures that they pass out to registered adviser personnel. As a reminder, periodically, we’ll post rules CCOs should never forget. We follow now with a third rule.

Rule Number Three: Communicate your role to your Boss(es)

To avoid the appearance that you are doing more than administering the compliance program, take the time to carefully define, in writing, your job responsibilities and take steps to ensure that person(s) who supervise you know them and understand the roles and limitations of the job. Then, periodically, take the time to remind them again and again. Were I to give a quiz to all of the managers who supervise CCOs, asking about the CCO role and what a CCO does, I venture, most of them (who have not served in that capacity or have no prior legal or compliance background) would, unfortunately, fail. Even more unfortunate, is that they and other employees believe that you are somehow, by definition, responsible for the day-to-day oversight of others. When you’re perceived as the person responsible for “signing-off” on the actions of others, you open yourself up for assuming supervisory responsibility, and thus liability, for those employees.

The SEC’s new whistleblower program officially became effective on August 12, and the SEC has launched a new webpage for people to report a violation of the federal securities laws and apply for a financial award.

Following enactment of Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Office of the Whistleblower was established by the SEC to administer its whistleblower program. The SEC has appointed Sean McKessy as its head. Under the program, the SEC may provide monetary awards to eligible individuals who come forward with high-quality original information that leads to an SEC enforcement action in which over $1,000,000 in sanctions is ordered. The webpage notes that the range for awards is between 10% and 30% of the money collected. See More…

The SEC has charged former professional baseball player Doug DeCinces and three others with insider trading ahead of a company buyout. DeCinces, a third baseman, played for fifteen seasons (1973 – 1987) in the major leagues for three different teams, including nine years with the Orioles and six years with the California Angels. The SEC charged that DeCinces and his associates made more than $1.7 million in illegal profits when Abbott Park, Ill.-based Abbott Laboratories Inc. announced its plan to purchase Advanced Medical Optics Inc. through a tender offer.

DeCinces agreed to pay $2.5 million to settle the SEC’s charges, and the three others also agreed to settlements.

The SEC’s complaint alleges that DeCinces received confidential information about the acquisition from a source at Santa Ana, Calif.-based Advanced Medical Optics. He then began purchasing shares of Advanced Medical Optics in several brokerage accounts, buying more throughout the course of the impending transaction as he received updated information from his source. During the period, DeCinces also illegally tipped three associates who traded on the confidential information – physical therapist Joseph J. Donohue, real estate lawyer Fred Scott Jackson, and businessman Roger A. Wittenbach. See more…

The SEC’s Chicago Office has filed a civil injunctive action in the U.S. District Court in Chicago against William A. Marovitz, the husband of former Playboy CEO Christie Hefner, charging him with illegal insider trading in Playboy stock in advance of public news announcements. See more…

This blog identifies and discusses new and developing regulatory issues that impact investment advisers, broker-dealers, corporations and individuals who either work in the securities industry or who are impacted by its regulations.